Questor share tip: Gem's prices continue to rise

Questor has been a fan of diamonds for some time because of their scarcity.
Gem Diamonds shares are a hold.

Supply is likely to be limited, as no major discoveries have been made in decades and, as demand recovers from a relatively low base in the US , prices should continue to rise.

This week, Gem Diamonds said it had achieved a record average value of $4,272 (£2,583) per carat from recent production at its Letseng mine in Lesotho. This brought the average value since the beginning of the year to $3,067 a carat, compared with $1,839 for the first three tenders in 2010.

The pricing environment in the current year is strong – with rough stone prices expected to rise. The company is also looking at expansion at Letseng and is developing its Gope project.

Prices for its fancy yellow diamonds, which are mined at Ellendale in Australia and sold to jeweller Tiffany, were renegotiated in October last year and talks over a second price review are ongoing.

Earlier this year, Gem revealed that it was in talks with Canadian–listed Lucara Diamond over a possible merger. No update was given on the situation in this week's announcement, but the group said that it expected to update the market on its new diamond reserves figures in the second week of May. This will allow investors to have a good look at how any potential merger would work.

Questor's view on the shares is unchanged at this time. The initial recommendation to buy into Gem was given too early and the shares are at around the same level as in January 2009.

However, they were also tipped as a buy at 233p and have recovered from remarkable lows. The average price target of five City analysts monitoring the shares is 318.8p. Trading on a current year earnings multiple of 18.7, falling to 14.7 next year, the shares remain a hold.